Utah Restricts Post-Employment Restrictions

[caption id="attachment_2116" align="alignright" width="113"] James P. Flynn[/caption]

The State of Utah recently enacted Utah Code Annotated 34-51-101 et seq., the so-called Post-Employment Restrictions Amendments, which limit restrictive covenants entered into on or after May 10, 2016 to a one-year time period from termination. Although this could curtail certain employers’ plans, the amendments enacted provide some important exceptions and are in fact much more favorable to employers than those first proposed, which would have precluded virtually all post-employment restrictions in Utah. The statute and the exceptions and limitations are discussed below.

The statute as written declares a non-conforming “post-employment restrictive covenant” is “void." Because Utah courts have not specifically adopted the “blue-pencil approach,” and any approach to reformation is unclear from case law or unresolved, the implications of the statute are unclear. Will voiding the “post-employment restrictive covenant” void the entire agreement of which it is a part, or just the post employment restrictions? Such questions remain to be answered.

The new law does have several important exceptions. It does not apply to (1) a “reasonable severance agreement,” (2) any restrictive covenants stemming from the sale of a business, (3) non-solicitation agreements, (4) nondisclosure agreements, and (5) confidentiality agreements. Perhaps most importantly, it is not retroactive. Of course, whether or not the statute will apply to an amendment to a pre-existing non-compete with a restricted period greater than one year remains to be seen.

Additionally, the statute’s exceptions must themselves be examined and applied with care. For example with respect to severance agreements, the statute will only allow enforceable post-employment restrictions “mutually and freely agreed upon in good faith at or after the time of termination.” Thus, employees may argue that the very use of a form restriction weighs against enforceability. Utah employers will need to carefully consider how to approach these issues, and to make any updates or changes to existing agreements before May 10, 2016.

Finally, and perhaps of most practical importance, Section 34-51-301 of the statute allows employees to recover attorneys’ fees where a post-employment restriction is found unenforceable:

If an employer seeks to enforce a post-employment restrictive covenant through arbitration or by filing a civil action and it is determined that the post-employment restrictive covenant is unenforceable, the employer is liable for the employee’s:
(1) costs associated with arbitration;
(2) attorney fees and court costs; and
(3) actual damages.

This provision could have a practical impact on the risk calculus associated with pursuing enforcement of restrictive covenants. Just another consideration among the many that are occasioned by this new statute.